Iron Mountain Inc (IRM) — Q3 2021 Earnings Call Transcript

Thank you, Chris. Good morning and welcome to our Third Quarter 2021 Earnings Conference Call. On today's call, we will refer to materials available on our Investor Relations website. We are joined here today by Bill Meaney, President and CEO, and Barry Hytinen, our EVP and CFO. After prepared remarks, we will open up the lines for Q&A. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the Safe Harbor language on Slide 2, and our annual report on Form 10-K for discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. With that, I'll turn the call over to Bill.

Thank you, Sarah, and thank you all for taking time to join us. We are pleased to have delivered strong performance in the third quarter reflecting our broad offerings, deep customer relationships, resilient business model, and the strength of our team. This can be easily highlighted by our 7.4% total organic revenue growth. This strong overall organic revenue growth has been delivered by continued strength in our storage business, as well as double-digit growth in our new and existing digital offerings, including data center and digital transformation services, and IT asset disposition or I-Tech. Throughout the pandemic, including the most recent challenges of the Delta variant, our Mountaineers around the world have truly stepped up. Each and every day, they put our customers first with a focus on growth. I'm both proud and humbled by this incredibly talented and dedicated team and what we've been able to accomplish through such a challenging time. Today's results, including our strong organic revenue growth exceeding 7%, is a direct result of their dedication in serving our customers in ways they need to keep their businesses growing. We have a lot to cover today, so I'll start with a brief overview of our results and key business drivers. During the third quarter, we reported revenue of over $1.1 billion and EBITDA of $418 million, both of which are new record highs. Our results are fueled by increased demand for our services across key markets and continued positive momentum in the business. Our digital services in ITAD business continue to build on its prior performance and deliver almost 20% growth in the quarter. Today, we're proud to say that 95% of the Fortune 1000 are among the 225,000 of our loyal customer base. We have a growing footprint of more than 1,460 facilities and with our recent expansion in the Middle East, we are now present in 63 countries. We are supported by 25,000 Mountaineers across the globe. As we look ahead to future opportunities, there is no doubt the world has changed. But, we're making the improvements to our business today to serve the changed needs of the world tomorrow. That is why we have built, evolved, and expanded our trusted relationships with our customers as not only the leading storage platform for physical assets, but also the business services partner to support data center co-location, information security, data insights, Secure IT Asset Disposition and business process management. With this focus, we have expanded our total addressable market to more than $80 billion. Together with our strong customer relationships, focus on innovation, and 70-year heritage, we are operating from a unique position of strength. Now let's turn to some of the exciting events during the quarter. You'll hear us talk a lot about customer centricity here at Iron Mountain. And when we help our customers not only protect their information but also unlock new revenue opportunities as well as cost efficiencies, that's a big win for our customers, and ultimately, for us. We were proud to be featured as one of the winners of Google's first-ever Google Cloud Customer Award for Financial Services for our work with a large financial institution. This is a great follow-on award from a couple of years ago when we won their Machine Learning Artificial Intelligence Partner of the Year. In this award, we leveraged our expertise in mortgage document processing to train machine learning models to automate document classification and data extraction and validation, deliver advanced exception management, and unlock value for our customers. In line with our automation-first mindset, we utilized Google's document understanding for AI algorithms in Iron Mountain's insight platform to identify, classify, extract, and validate loan data to support authenticity, accuracy, and completeness. As a result of our services, the customer has seen efficiency improvements including a 25% post-closing cost reduction, increased scalability, a shortened cycle time, and increased responsiveness to market demand, among other enhancements. We are not only proud of our work with this financial services customer, but are also dedicated to continuing to enrich our customer's ability to protect and preserve their high-value assets and in turn, assist them in gaining market share in their businesses through higher end-customer satisfaction. I'm also pleased to report that Iron Mountain received the JP Morgan Chase Strategic Diverse Gold Supplier Award for our commitment to supplier diversity and the contributions of our very own supplier diversity program. Together with our fellow Gold Suppliers, we have collectively agreed to increase spending with diverse-owned businesses and have set ambitious goals over the next three years. As part of this, we are on track to achieve our goal of $63 million in supplier diversity spend by the end of 2021. This is not just about our diversity goals but is also about helping our customers like JPMorgan Chase and our fellow Gold Suppliers to drive improvements in supplier diversity, which we recognize is important for all communities in which we operate. By working together, we're having a far greater impact than any one company can achieve alone. I would now like to highlight our recent win working together with General Dynamics. You will recall we have been speaking for some time about the potential for our services inside the U.S. Federal Government. While the transformation of the federal government has taken some time, we have seen over the past year major growth in our business across several governmental agencies. This growth is due not only to the residents that our products are having with the government and assisting them on their own transformation paths, but also to the work our government team has done in partnership with the likes of General Dynamics. This partnership is already resulting in a 3-year Iron Mountain contract worth $23 million to help the Department of Veterans Affairs with their digital transformation in order to better serve our U.S. soldiers. As part of this initial project, we're helping the U.S. Department of Veterans Affairs digitally process an estimated 15 million official military personnel files. Through digital transformation, this agency is taking a proactive approach to provide greater access to personnel files, as well as streamline the overall claims process to get veterans the benefits they deserve. Additionally, I would like to highlight another win in our global Records and Information Management segment. We have had a long-standing relationship with a major global financial institution for over 20 years, and we have recently expanded our relationship with them by signing a new 10-year global contract in which they committed to renew and consolidate all global records in data management business with us. Through this work, along with our global scale, we won an additional two-year contract for data restoration and migration services. We will provide the customer with clear, detailed information from backup tapes spanning 11 years, which will help them make informed decisions around data deletion, retention, and remediation. Ultimately, we will improve and enhance data management and compliance. Finally, turning to data centers, we are well on track to exceed our bookings target of 30 megawatts this year. In fact, through October, we stand at 24 megawatts, in addition to our continued growth in bookings this quarter; we closed on the acquisition of our new data center in Frankfurt. When we purchased the new Frankfurt data center, we inherited over 2 megawatts of existing clients, and we have expansion capacity of 8 megawatts for a total of over 10 megawatts on that site. Already in this quarter, we have signed 1.6 megawatts of new leases for this site and have a strong pipeline which should absorb the remaining capacity over the next 2 to 3 years. I should also add that our first purpose-built data center in Frankfurt is up and running, and a tenant that leases the entire 27 megawatts is moving in this quarter. With this transaction in Frankfurt, we now have a total potential capacity in Europe of more than 107 megawatts, which provides access to important interconnection markets for new and existing customers looking for reliable, flexible, and secure data center locations across the Frankfurt, Amsterdam, and London markets. Even with our rapid growth, sustainability remains at the core of how we offer data center capacity. Iron Mountain continues to source more than 100% of its energy used for data centers from renewable energy. Moreover, as we announced in April, we took a significant step forward in the development of enhanced solutions for purchasing renewable energy by entering into an agreement to track the hourly load. I'm proud to announce that this September, we were able to report on our performance for the first half of the year for our data centers in Ohio, Pennsylvania, and New Jersey that are benefiting from this agreement. Over the past several months, we have taken definitive steps towards a truly carbon-free energy supply. Not just by offsetting our carbon footprint by purchasing and reselling renewables, but by matching renewable energy in the very grids in which we operate. We are the first company to join Google to adopt the 24/7 carbon-free energy goal, and we became a founding signatory to the new UN Clean Energy Compact being released at COP26 this week. We can already publish 24/7 carbon-free energy performance at three of our campuses, becoming the first large co-location data center provider with this capability. We recognize that we are an important component of our clients' energy footprint and we will continue to take every opportunity to minimize our environmental impact on their behalf. The awards and successes I outlined today are just a few among the various wins Iron Mountain has achieved this quarter. As we continue to deliver accelerated growth at Iron Mountain, despite the continued impact of COVID on some of our traditional service areas, I am confident that our resilient business model, expanded product portfolio, customer-first culture, and strategic transformation will continue to deliver strong sales growth. With that, I will turn the call over to Barry.

Thanks, Bill. And thank you for joining us. The third quarter exceeded our expectations across each of our key financial metrics. Continuing the trend, we have seen over the last few quarters, revenue continued to strengthen with a strong recovery in service revenue, reflecting accelerating rates of growth driven by the new service offerings Bill discussed. Our core physical storage business performed well, and we are seeing continued strength in our growth areas. Turning to our results for the quarter. On a reported basis, revenue of $1.13 billion grew 9%. Total organic revenue increased 7.4% year-over-year. As an example of the momentum we are building on a two-year basis, our organic revenue growth continued to accelerate in the quarter. Organic service revenue increased $61 million or 18%. Our team drove strong growth in both Global Digital Solutions business and Secure IT Asset Disposition. Total organic storage rental revenue grew 2.3% with continued benefit from pricing and positive trends in volume. Adjusted EBITDA was $418 million, an increase of $42 million from last year. We exceeded the projections we shared on our last call as the team drove improved margin performance, despite the stronger U.S. dollar. AFFO was $263 million or $0.90 on a per-share basis, up $47 million and $0.15 respectively from the third quarter of last year. Turning to segment performance. In the third quarter, our global RIM business delivered revenue of $996 million, an increase of $74 million from last year. On an organic basis, revenue increased 6%. The team performed well with constant currency storage rental revenue growth of 2.7% or 1.8% on an organic basis. This performance reflects an acceleration in growth compared to the last few quarters. Growth was driven by pricing and volume. With positive volume trends in the Middle East deal that Bill mentioned, total physical volume achieved a new all-time record of 744 million cubic feet. We are pleased with the underlying trends and continue to expect total volume on an organic basis to be flat to modestly up for the full year. Our traditional services business continues to recover from the pandemic with revenue growing 14% year-over-year, although it is still down 4% from the levels achieved in 2019 reflecting the continued COVID impact. Global RIM adjusted EBITDA was $443 million, an increase of $49 million year-on-year. Adjusted EBITDA margin expanded by 180 basis points year-over-year as a result of strong operating leverage and improved service margins. Turning to our global data center business, our team booked 9 megawatts in the quarter. Through the end of the third quarter, we have booked 22 megawatts. With our strong and building pipeline and the additional contracts we've already signed this quarter, we are confident in our ability to exceed our full-year guidance of 30 megawatts. In terms of revenue as we projected, growth accelerated sharply to 22% year-over-year. In light of our strong performance year-to-date and prior-year bookings, we now expect full-year revenue growth of at least mid-teens percent, exceeding our prior projections. Adjusted EBITDA margin of 40% was consistent with the expectations we shared on our last call and driven by Buildout services at our Frankfurt facility. Turning to Project Summit, this quarter, the team delivered $38 million of the incremental year-on-year adjusted EBITDA benefit. We continue to expect year-on-year benefits from Summit of $160 million with another $50 million of year-on-year benefit in 2022. Total capital expenditures were $138 million, of which $100 million was growth, and $38 million was recurring. Turning to the balance sheet, we ended the quarter with net lease adjusted leverage of 5.4 times, slightly better than our projection. As we have said before, we are committed to our long-term leverage range of 4.5 to 5.5 times. For 2021, we expect to exit the year at levels at or below the third quarter. From a cash cycle perspective, I would like to highlight that our team drove a two-day improvement from last year and specifically call out that our Days Sales Outstanding are at the best level they've been at in several years. With our strong financial position, our Board of Directors declared a quarterly dividend of $0.62 per share to be paid in early January. Turning to our outlook. With the ongoing pandemic and where we are in the year, I feel it will be helpful to provide our view explicitly for this quarter. We expect total revenue growth to be in the high single-digit percentage range year-over-year in the fourth quarter. For EBITDA, we expect percentage growth to be in the range of low double-digit to low teens year-over-year in the fourth quarter. We expect year-over-year AFFO growth in excess of 30% in the fourth quarter. As you may remember, last year we had an elevated level of maintenance capex in the fourth quarter as we caught up from pandemic-driven delays. On a more normalized level of capex spend last year, this implies at least 20% growth in AFFO in the fourth quarter of 2021. In summary, our team is executing well, our pipeline is growing, and momentum continues to build across our business. Our addressable market continues to expand and we feel confident in our ability to drive growth. We feel well-positioned and look forward to updating you on our progress following the fourth quarter. And with that, Operator, please open the line for Q&A.

I guess good morning. Bill and Barry. I've gotten questions from investors. Their bottom line, growth, and margin improvement has benefited from Project Summit. And that benefit will be less of a factor going forward. Can you outline what revenue growth opportunities you are positive about for Iron Mountain looking out the next few years? And a related question to that is, can you also outline how you're able to effectively present such a broad offering of products to your customers when it appears there are different contexts at the customers for storage versus data centers versus Insight?

Good morning, Sheila. I will begin by discussing the strategic direction of our product portfolio, after which Barry will provide additional insights on the specifics regarding margin. Thank you for your question. First, as part of Project Summit, we have achieved a record high EBITDA margin this quarter, which is a significant benefit. This margin may fluctuate based on product mix, which ties into your question about our product portfolio. An aspect of Summit that isn't directly reflected in the margin is that we've reinvested substantial benefits back into the business. This reinvestment has contributed to our total addressable market increasing from $10 billion to $80 billion, as we've mentioned in recent quarters. Nearly 20% of that new market opportunity is attributed to the growth in digital services, particularly our insight-driven digital platform and IT Asset Disposal business. These are new areas that relate to your question. We see that segment growing at a strong double-digit rate and expect this trend to continue. Additionally, our data center businesses are experiencing ongoing growth and a sustained increase in bookings, indicating we are well-positioned to surpass our upgraded guidance of 30 megawatts for this year. We anticipate ongoing revenue growth at levels similar to what we've seen recently, driven largely by new product areas rather than a rebound from previous low activity due to COVID. Barry, would you like to add some comments regarding the margin?

Hi, Sheila. Good morning and thanks for the question. I would say when we look at our outlook and you look at where our margin has been recently, where it's going to continue to go, we have very favorable trends in pricing. I think that you will continue to see at least the level of pricing activity going forward as we've seen here over the last year or so. There are some macro trends that are both positive for us I think on a pricing benefit. If you look at our data center business, the margin, as we talked about, has on a transitory basis been a little bit lower than where we expect it to go over time. That business is obviously dealing with some fit-out on our Frankfurt facility, which is transitory here in the third and the fourth quarter. As we move forward, we see that margin expanding. So that's a very nice secular tailwind to the business. I would say that when you look at ongoing productivity, we continue to see that. While Summit has been incredibly beneficial to the business and we'll have more Summit benefit year-on-year next year, we certainly see the opportunity for additional productivity. The only other thing I'll say is, as you know, since you follow the company well, we've had a couple of relatively large sale leaseback transactions over the last 12 months. While I expect to continue to do a relative amount of capital recycling, that's been a big headwind on a year-over-year basis. So if that comes down to a more normalized level going forward, that will also be a benefit.

Hi, thanks. Good morning. As it relates to your overall growth portfolio, can you provide a sense of how quickly it grew and also discuss examples of recent success and traction outside of your Data Centers business?

Thank you, George. This quarter, we observed nearly 20% growth, primarily driven by our IT Asset Disposal business. We recently secured significant global contracts with large corporations focused on securely destroying information on their devices while also ensuring environmentally friendly practices. Another key factor is the rapid adoption of our InSight platform and the broader digitization of information. This includes users retrieving documents electronically through the InSight platform securely in the cloud, as well as our Digital Mailroom solution, which enhances hybrid work by allowing access to mailroom documents from anywhere. Additionally, I've recently returned from the Middle East, where we are assisting a government and their National Archives in digitizing their operations. This project utilizes not just the InSight platform but also auto-classification to create metadata for secure digital information sharing. These aspects are driving significant top-line growth, along with our data center business, which will continue to grow due to strong bookings. However, we should not overlook the steady growth in the traditional areas of our business, primarily supported by pricing.

I apologize, I was muted. Thank you. I wanted to inquire about the storage business and the various factors affecting it. It appears there was an acquisition that added around 10 million cubic feet. You're achieving some pricing increases and there's organic growth as well. However, when I look at the total revenue from adjusted storage, including terminations and permanent withdrawal fees, it seems to be mostly flat sequentially. I'm curious about the factors influencing this on a sequential basis because you mentioned last quarter that you expected some volumes to pick up due to COVID-19. I'd like to understand how this is impacting revenue as the year progresses.

Hi Shlomo, it's Barry, thanks for the question. I will try to unpack that for you. So you are right. We did close on the transaction in the Middle East, which we think is a great platform for us to continue to grow in that region together with our existing business. Now I will note that that closed very late in the quarter in the second half of September, so it really had almost no benefit to the quarter in terms of the financials, albeit it is in our cube as you note. So that didn't really help the sequential. On the pricing, you might recall that at the beginning of the year and then again on the quarter call, I mentioned that all the pricing we had planned for was already set as of March or April. Therefore, the sequential benefit from pricing was minimal, and we weren't planning for it. Additionally, the other thing I will call out, as you think about storage sequentially, is we did divest the software escrow business in June, in the first part of June last quarter. The sequential move from the second to the third on storage was completely due to that being in the second quarter, but not in the third quarter. So all in, we feel quite good. In fact, I'll tell you that the storage revenue performed better than we were planning on a sequential basis. As it relates to the point about pent-up demand, you'll recall last quarter we did note that in some of the economies, particularly in Asia, and I’d say with the COVID and Delta variant, there are various other elements that occurred in some of those markets, we continue to have a pretty good-sized backlog. Bill, anything you want to add?

No. I think that covers that.

Great. Thanks for taking the question. I wanted to touch upon a fairly topical area in data centers today. A lot of talk in the industry about cost inflation in terms of development costs along with supply chain challenges and getting new equipment. Maybe you could just give us your perspective on what you're seeing in your footprint. Whether there are any development cost, inflation, any development delays in terms of timing. And also the impact of higher power costs, particularly in Europe. And then from a broader pricing perspective, do you think that this environment may be supportive of industry pricing moving upwards in the next couple of years as we work through all these challenges? Thanks.

Thank you for the question, Eric. I have a few points to address. For 2022, we are well covered regarding supply chain issues due to the lead time. However, we have observed a 10 to 12 week increase in supply chain lead times for some MEP and related equipment, including steel in certain markets. While there has been an increase in lead times, our coverage for 2022 is secure due to committed contracts already in place for the build-out. As we plan for 2023, we are considering this extended lead time for some equipment. On the price increase front, we are effectively protected for our 2022 commitments since we have already established those contracts. We are experiencing inflation in some raw materials, but because the construction costs are generally known and transparent to our customers, we expect to align our pricing with the construction costs. Our business model allows us to remain naturally hedged due to this transparency. Regarding power costs, we are also well covered this year, but there has been a rise in pricing across almost all markets. About 60% of our portfolio for 2022 will be power pass-through, meaning we are not exposed to rising power costs. Most of the remaining portion is under long-term power contracts. Thus, more than 70% of our business is naturally hedged, with some contracts up for renewal in 2022. Consequently, we do not anticipate any significant impact from power costs. In fact, we foresee a steady improvement in our EBITDA margins as we progress into 2022. Thank you again for the question.

Hi, this is Alex on for Andrew Steinerman. Our question is regarding your guidance. Your guidance for high-single-digit percentage growth in revenue and low double-digit to low-teens percentage growth in EBITDA for the fourth quarter appears to imply an adjusted EBITDA margin of about 36.5%. Can you confirm that we're doing the math there right? Maybe speak to some of the drivers behind that? Thank you.

Hi, Alex. It's Barry. Thanks for the question. Why don't I help you with both the revenue and the EBITDA the way we are thinking about it? So in the fourth quarter, you are right, we said about high single-digit. So let's say that's 8% or 9% on the revenue side just to give you a couple of the puts and takes. We have the dollar is stronger as we have less than a point of FX benefit year-on-year, and a similar amount from M&A less than a point because just as a reminder, as I mentioned to Shlomo, we divested that software escrow business in the second quarter. As a result, there's not much M&A benefit. So that leaves you with about 7% of organic constant currency growth. With the strength of the Data Center business, that'll contribute probably 1.5 points alone because that business is performing very well. Therefore, you should be working with your model and think like 20-plus percent growth in the fourth quarter from our Data Center business. The balance should come from low-single-digit growth in our storage rental revenue. That will be with good pricing contribution. The remainder is, as Bill highlighted on the call, the very nice growth we're seeing out of our Digital Solutions and ITAD business. On the EBITDA side, we're looking at low double-digit to mid-teens growth. Let's say that's about 13% for the purpose of this discussion, which is about $48 million of year-on-year increase. FX is a very small contribution, almost nothing, and M&A would be actually a net negative on a year-over-year basis in light of the escrow business being very high-margin. Think about data center as having a modest increase in margin sequentially still affected by the fit-out in Frankfurt. A few million of benefit to EBITDA from data center. Our Summit Project is doing phenomenally well and the team is executing very well. You'll probably see $30 million of year-on-year benefit in the quarter from that. Then of course, pricing will continue to be a very strong contributor, and I expect service margin to continue to improve which you've been seeing throughout the year. Naturally, there are some offsets with sale leasebacks, as I mentioned earlier, and higher levels of commission in light of the very good trajectory the team is driving on top-line. So we're feeling very good about the fourth quarter as we sit here today, and look forward to talking to you about it in 90 days. Thank you. Have a great day.